Your life has become one of hard choices.
Do you pay credit cards or your mortgage (hint- always pay your mortgage if you can afford to keep your home)? Do you pay taxes or buy food? Do you borrow more money to pay existing debts, only later to find you are even further in debt? When your income is less than your expenses, and you do not see any reasonable way to increase income, what are your choices?
What is the difference between paying minimum payments on your debts, using a debt settlement company, or filing bankruptcy?
Like hundreds of thousands of people today, let’s say you had a financial setback, such as losing your job, medical problems, divorce, death, or the birth of a new child. These all affect your ability to pay the existing debts. The following are some examples comparing making minimum payments on credit cards, using a debt workout company, and filing a bankruptcy.
Continue to make minimum credit card payments over the next decade or more.
For example, you owe $30,000 in credit card debt. If you continue to make minimum payments, you’ll pay $700 per month for 9 years and will have paid $75,829.36 during that time. According to Experian: “If you only pay the minimum due on your credit card, the remaining balance may accrue interest and increase your credit utilization, which could negatively affect your credit scores and make it harder to get out of debt.”
Debt settlement:
The salespeople of the debt consolidation company urge you to borrow more money with the promise of long-term payouts “that you can afford.” What they don’t tell you is high costs over the life of the loan. They don’t tell you that they do not help you with all of your creditors, only some. They don’t tell you that your credit reports will show that the debts are “not paid as agreed,” which will have a similar credit hit as a bankruptcy. They don’t tell you about the tax consequences of paying less than you owe.
If you hire a debt consolidation company, you are looking at an interest rate anywhere from 18% to 36%, or higher, plus there may be “administrative expenses.”. Over five years, that means you’ll pay $700 or more every month, totaling around $43,000 or higher by the time it’s done. That’s over $13,000 in interest alone, plus the additional administrative costs, not to mention the hit to your credit, the tax consequences, and the financial stress on you and your family over the last decade.
Sure, they promise to cut your debt in half, but they don’t mention their fees—usually around 20%. Nor do they mention the fact that any forgiven debt gets reported to the IRS as taxable income. On $30,000, that means you’ll pay at least $21,000 out of pocket, plus whatever taxes are due, which means you pay more than $51,000 + forgiveness of debt taxes. For those debts that were not part of the debt settlement, you will still be hounded and eventually sued. The judgment creditors have the right to garnish your wages and bank accounts, put a lien on your home, and seize any property that is not exempt.
The salesperson employed by the debt settlement company does not share the hundreds of debt settlement scams (see articles: https://dianedrain.com/what-is-debt-settlement/, https://dianedrain.com/debt-settlement-bad-alternative-bankruptcy/, https://dianedrain.com/how-to-safeguard-from-debt-relief-scams/, https://dianedrain.com/bankruptcy-articles/paralegal-credit-counseling-schemes-scams/.
Google Ameridebt (one of the first of many debt workout companies that were shut down). “AmeriDebt was a debt management company that was involved in a lawsuit with the Federal Trade Commission (FTC). The FTC alleged that AmeriDebt engaged in deceptive practices and violated the Federal Trade Commission Act. The FTC won the lawsuit and returned almost $13 million to consumers and ordered AmeriDebt to shut down.”
How about filing bankruptcy? There are two types of bankruptcy.
A Chapter 7 bankruptcy:
Bankruptcy is a constitutional right. People never want to have financial problems, but life has it’s own plans. They have $30,000 in credit card debt, $20,000 in medical debt, $15,000 in debt from a repossessed vehicle, $12,000 in personal loans, and $20,000 in old tax debt. A Chapter 7 will eliminate $97,000 for the cost of filing a Chapter 7 (usually under $3,000).
A Chapter 7 allows an honest debtor to keep the things that are protected by law, called exempt property, and those they want to pay for (such as a house and vehicle). But get rid of most of their debts: medical bills, credit card debt, personal loans, business loans, and vehicle loans on repossessed cars, to mention a few. It can even eliminate old taxes (there are rules). There is no tax on getting rid of these debts (except perhaps taxes on some business debts). Absent fraud, the debtor should be able to get a fresh start without all these debts.
The “means test”—the” debtor’s income, family size, and county they live in—may determine if they can file a Chapter 7 or Chapter 13.
Now, let’s look at Chapter 13.
Let’s say all your assets are exempt and you only have credit card and medical bills, totaling $50,000. Total income for your family of 4 is under $110,040. You are able to choose between a Chapter 7 and a Chapter 13.
Under a Chapter 13 you can save a house in foreclosure, you can pay off a vehicle (perhaps reduce interest), pay back taxes that will not go away in a Chapter 7, etc. You propose a court-approved payment plan based on your actual ability to pay, minus your expenses. The plan comes to $350 a month over three years. By the end, you’ll have paid $12,600 total. No interest. No tax liability. If your situation is more complicated and you have secured debts, such as house arrears, vehicles, and back taxes, then your plan payment will increase to cover those debts. Each plan is customized to your unique facts. The balance of any unpaid unsecured debts is gone.
The Chapter 13 covers all your debts, not just a few. At the end, you’ll walk away with a clean slate and no lingering financial obligations. Each Chapter 13 fact pattern is different.
Talk to an experienced chapter 13 attorney. Typically, the best ones charge by the hour, not a flat fee. The reason is that a Chapter 13 could take 10 hours or 110 hours. There is no way to know at the start because people’s situations change during the three to five years of the plan. Mass-production firms (those who treat their clients like cattle and are only focused on money) charge a flat fee and will stop representing you once the plan is confirmed (usually 6-9 months after filing). That leaves you without an attorney for the next three to five years of your plan. Many good attorneys will not take clients who have used the mass-production firms because the court documents are almost always bad and have to be completely redone.
The moral to this story:
Always do your homework before deciding who to hire (doctor, attorney, handyman, gardener, etc.). Having a job done correctly the first time will cost you less than hiring the cheapest person.

Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.
*Important Note from Diane: Everything on this web site is offered for educational purposes only and not intended to provide legal advice, nor create an attorney client relationship between you, me, or the author of any article. Information in this web site should not be used as a substitute for competent legal advice from an attorney familiar with your personal circumstances and licensed to practice law in your state. Make sure to check out their reviews.*
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